Jeremy Grantham and Climate Change

I am sometimes amazed by how climate change has become almost a taboo issue in certain circles of the investment community. For example, John Mauldin, who writes Thoughts from the Frontline, probably the most-widely circulated and read financial newsletter in the world, barely touches on the issue. Is he a skeptic? My sense is ‘yes’ based on his musing on volcanoes in his 2011 New Year piece, although it is difficult to tell.

Yet regardless of his own inclination, my suspicion is that John has decided to ignore climate change for fear of upsetting his readership base, given the political polarisation that the issues produces. Paraphrasing Oscar Wilde, climate change has become the investment topic that dares not speak its name. It is therefore refreshing to find at least one high profile investment manager who is not afraid to take a very public stand on the issue: Jeremy Grantham.

1) The amount of carbon dioxide (CO2) in the atmosphere, after at least several thousand years of being quite constant, started to rise with the advent of the Industrial Revolution. It has increased by 40% and is rising each year. This is certain and straight forward.

2) One of the properties of CO2 is that it creates a greenhouse effect and, other things being equal, causes the temperature to rise. This is just physics.

3) Several other factors, like changes in solar output, have major inﬂuences on climate over millennia, but these effects are known, are observable, and have been allowed for in current models. Critically, there have been no important changes in these other factors over the last 100 years.

4) The doubts arise when it comes to the interaction of CO2 with other variables in a complicated system, especially water vapor. It is impossible to be sure whether the temperature will rise slowly or rapidly. But, the past can be measured. The temperature has indeed steadily risen and is well within the boundaries predicted for the man-made effect. But the forecasts still range very widely, from a harmless negligible rise to a potentially disastrous +6 degrees Fahrenheit or higher within this century. The main danger of the CO2 interaction with water vapor is the high probability that it will cause a great increase in severe precipitation episodes.

5) Skeptics argue that this wide range of uncertainty lowers the need to act: “Why spend money when you’re not certain?” But since the penalties rise hyperbolically at the tail, a wider range implies a greater risk (and a greater expected value of the costs). This is logically and mathematically rigorous and yet is still argued.

6) Pascal asks the question: What is the expected value of a very small chance of an inﬁnite loss? And, he answers, “Inﬁnite.” In this example, what is the cost of lowering CO2 output and having the long-term effect of increasing CO2 turn out to be nominal? The cost appears to be equal to foregoing, once in your life, six months’ to one year’s global growth – 2% to 4%, or less. The beneﬁts, even with no warming, include: energy independence from the Middle East; more jobs, since wind and solar power and increased efﬁciency are more labor-intensive than another coal-ﬁred power plant; less pollution of streams and air; and an early leadership role for the U.S. in industries that will inevitably become important. Conversely, what are the costs of not acting on prevention when the results turn out to be serious: costs that may dwarf those for prevention; and probable political destabilization from droughts, famine, mass migrations, and even war. And, to Pascal’s real point, what might be the cost at the very extreme end of the distribution: deﬁnitely life changing, possibly life threatening.

7) The biggest cost of all from global warming is likely to be the accumulated loss of biodiversity. This features nowhere in economic cost-beneﬁt analysis because, not surprisingly, it is hard to put a price on that which is priceless.

8.) A special word on the right-leaning think tanks: As libertarians, they abhor the need for government spending or even governmental leadership, which in their opinion is best left to private enterprise. In general, this may be an excellent idea. But global warming is a classic tragedy of the commons – seeking your own individual advantage, for once, does not lead to the common good, and the problem desperately needs government leadership and regulation. Sensing this, these think tanks have allowed their drive for desirable policy to trump science. Not a good idea.

9) Also, I should make a brief note to my own group – die-hard contrarians. Dear fellow contrarians, I know the majority is usually wrong in the behavioral jungle of the stock market. And heaven knows I have seen the soft scientists who lead ﬁnance theory attempt to bully their way to a uniform acceptance of the bankrupt theory of rational expectations and market efﬁciency. But climate warming involves hard science. The two most prestigious bastions of hard science are the National Academy in the U.S. and the Royal Society in the U.K., to which Isaac Newton and the rest of that huge 18th century cohort of brilliant scientists belonged. The presidents of both societies wrote a note recently, emphasizing the seriousness of the climate problem and that it was man-made. (See the attachment to last quarter’s Letter.) Both societies have also made full reports on behalf of their membership stating the same. Do we believe the whole elite of science is in a conspiracy? At some point in the development of a scientiﬁc truth, contrarians risk becoming ﬂat earthers.

10) Conspiracy theorists claim to believe that global warming is a carefully constructed hoax driven by scientists desperate for … what? Being needled by nonscientiﬁc newspaper reports, by blogs, and by right-wing politicians and think tanks? Most hard scientists hate themselves or their colleagues for being in the news. Being a climate scientist spokesman has already become a hindrance to an academic career, including tenure. I have a much simpler but plausible “conspiracy theory”: that fossil energy companies, driven by the need to protect hundreds of billions of dollars of proﬁts, encourage obfuscation of the inconvenient scientiﬁc results.

11) Why are we arguing the issue? Challenging vested interests as powerful as the oil and coal lobbies was never going to be easy. Scientists are not naturally aggressive defenders of arguments. In short, they are conservatives by training: never, ever risk overstating your ideas. The skeptics are far, far more determined and expert propagandists to boot. They are also well-funded. That smoking caused cancer was obfuscated deliberately and effectively for 20 years at a cost of hundreds of thousands of extra deaths. We know that for certain now, yet those who caused this fatal delay have never been held accountable. The proﬁts of the oil and coal industry make tobacco’s resources look like a rounding error. In one notable case, the obfuscators of global warming actually use one MIT professor who also defended tobacco! The obfuscators’ simple and direct motivation – making money in the near term, which anyone can relate to – combined with their resources and, as it turns out, propaganda talents, have meant that we are arguing the science long after it has been nailed down. I, for one, admire them for their P.R. skills, while wondering, as always: “Have they no grandchildren?”

12) Almost no one wants to change. The long-established status quo is very comfortable, and we are used to its deﬁciencies. But for this problem we must change. This is never easy.

13) Almost everyone wants to hear good news. They want to believe that dangerous global warming is a hoax. They, therefore, desperately want to believe the skeptics. This is a problem for all of us.

The New York Times has just published an article entitled “Can Jeremy Grantham Profit from Ecological Mayhem” that I hope will introduce Grantham’s views to a wider audience. The title of the article is somewhat deceptive to the degree that Grantham’s charitable actions aim to prevent ecological mayhem. But what is new in the article is Grantham’s proposal that climate change should be recast as a resource issue to gain some political traction. In his own words:

“Global warming is bad news. Finite resources is investment advice.”

Personally, I believe that climate change can be sold as a financial threat from a variety of angles. To the question “Have they no grandchildren?”, I think the answer is “Yes they do”. And the grandchildren will take a variety of hits. Some via climate-induced resource limitations bearing down on economic growth, and some through direct hits via sea level rise and extreme weather events. In the final analysis, those ignorant of global warming will see their wealth, and wealth of their families, transferred to those who are informed.